Wall Street Wk Ahead: Stocks to track earnings with eye on Europe

After suffering their worst two weeks of the year, stocks will look to quarterly earnings to determine whether the recent pullback has been exhausted or more losses are justified.

Alcoa Inc opened the earnings season with a bang, reporting a first-quarter profit on Tuesday instead of the expected loss. That positive surprise foretold a trend. Of the 32 companies in the S&P 500 that have reported earnings so far, Thomson Reuters data showed that 75 percent - or two dozen - have beaten Wall Street's expectations.

This week will start one of the busiest weeks of the quarterly earnings reporting period. About 86 companies in the Standard & Poor's 500 are expected to post results, according to Thomson Reuters Director's Report.

At Friday's close, both the Dow Jones industrial average and the S&P 500 suffered their worst two-week percentage drops since late November. The Dow and the S&P each fell 2.7 percent for the two weeks from the close on March 30.

It seems like everybody's been waiting for this so-called correction to potentially get back into the stock market, said Kei Sasaki, managing director of listed equities at PineBridge Investments in New York, which has $67 billion in assets under management.

Wall Street typically defines a correction as a drop of 10 percent from a recent peak. The S&P 500 is down 3.4 percent from April 2 when it closed at its highest level since mid-May 2008.

The correlations on a moving average have also stayed relatively subdued, which tells us that investors are still looking at the market in a fundamental way that they haven't for the past year, Sasaki added. So if earnings come in positive for the first quarter, we think they will get rewarded for it.

Financials will also be eyed this week on the heels of Friday's results from JPMorgan Chase & Co and Wells Fargo & Co. Both big banks' earnings exceeded forecasts. In the coming week, earnings are expected from the likes of Citigroup Inc , Goldman Sachs and Morgan Stanley .

RIDING THE EURO-ZONE ROLLER COASTER

But even with earnings attracting investors' attention, equities remain vulnerable to flare-ups in the euro zone as the bloc continues to grapple with its debt crisis.

Last week, the benchmark S&P 500 had gained for two consecutive days after a drop of more than 4 percent in the previous five sessions. That opened the possibility that equities had seen the pullback many analysts were expecting after the S&P 500 climbed 12 percent in the first quarter.

The S&P 500 remained near its 50-day moving average, a key technical level that could help indicate the next direction for stocks.

Technically, we were due for a correction, we started that correction, and the market will always come up with reasons and find excuses that fundamentally will trigger what should happen technically - and it's happened almost perfectly, said Paul Mendelsohn, chief investment strategist of Windham Financial Services in Charlotte, Vermont.

How far backwards we are going to fall remains to be seen - we've got support at that 1,358 area, and we are playing around the 50-day moving average area.

The S&P 500 closed on Friday at 1,370.26. For the day, it was off 1.3 percent. For the week, it was off 2 percent.

Despite the recent declines, the S&P 500 is still up 9 percent for the year.

CHECKING THE ECONOMY'S VITAL SIGNS

The data will also get plenty of scrutiny this week for signals on the U.S. economy's health after a weaker-than-expected jobs report cast doubt on the recovery's strength.

Economic indicators due this week include the Empire State and Philadelphia Federal Reserve's manufacturing surveys, retail sales for March, housing starts and existing home sales.

It will be interesting to see if this is the beginning of a soft patch, if this unemployment number is a harbinger of more, said Stephen Massocca, managing director of Wedbush Morgan in San Francisco.

The March nonfarm payrolls report, which was released on Good Friday when the cash U.S. stock market was closed, showed just 120,000 jobs added last month. That figure fell far short of the forecast for 203,000 new jobs and raised questions about whether the recovery in the U.S. labor market was stalling.

Sasaki of PineBridge Investments pointed out that employment's been under everybody's watch since Good Friday. We still continue to see improvement. We believe it was a hiccup but in aggregate, we think the economic recovery is still continuing to improve.

But even if earnings are solid and data shows improvement, markets could be susceptible to further losses if more signs of fiscal distress in the euro zone emerge.

You have to put Europe, Spain and Italy, on any 'watch list' at this point. That may even be more important than earnings, Massocca said.

It's not really a liquidity issue. It's a solvency issue, and there are a lot of political whirlwinds around that, and there are a lot of concerns that the political will to actually do something is not going to be. We shall see.

(Wall St Week Ahead runs every Sunday. Questions or comments on this column can be emailed to: charles.mikolajczak(at)thomsonreuters.com)

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